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some ideas on BRL

After a big stress this year BRL seems to be trying to recover some ground recently. If it wasn't always hard to deal with EM currencies, a very important election turns things to a nightmare.  Will try here to break through some of the noise to find some sense of the recent market.

As the candidates are finally showing up in the media recently, market seems to be realizing that there is no chaotic scenario even with a less liked candidate. To make things even better, a perfect candidate in the market's view is showing some life now. That might be too early but some risks must be discounted in the price after all...

technically USDBRL is trying to break some important levels now.



comparing with a EM basket since last year is possible to see that a lot of bad news have been priced...




specially if compared to a more fundamental long term view...



also looking through a model based on PPP, country risk and commodities...



I ran a simple simulation with the same model to figure whe…
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Global USD still alive

It seems to be clear from the last few days that USD index (broad and narrow) is not dead. After  a long cliff since Trump's election it seems now to have found a bottom in the short term, and probably medium term also. Signs of a bit stronger inflation in US and weaker than expected Euro numbers have worked their way through the currency market despite the narratives of US twin deficits that had been hovering around. As usual, narratives and bondwagon effect have their influence in the short run, specially when supported by rate differences. Some charts below with recent trend and short/medium term aspects to watch.


USD spot index...trend is (or was) your friend?



short positioning of Non commercial players




2 years rate difference between US and other G7



German DAX/SPX relative value and EUR lag year %



Euro/US core CPI difference and EUR lag Year %


and finally unemployment rate difference between G7 and US. Despite the short term influences in the charts discussed above, its possi…

Starting 2018 with a slower global growth?

It's been 6 months since I last wrote about global trade growth, so it's time to have a look again.
After a pretty good recovery since early 2016 and reaching 5% growth on year over year basis it seems now that it has lost some momentum, at least for a while. But what makes me more worried about next few months ahead is that most US and Germany economic surveys are at multi year highs. That should be a good news if it wasn't for he fact that historically those indexes hardly hold much longer at those levels. And when they turn they usually impact global trade, financial markets and stocks for a while.


Let's look first at some global trade indexes:

CPB Global trade volume looks to be loosing some steam...




RWI Index also has slowed.



Now some surveys in Germany and US:

Germany IFO and Europe Consumer Sentiment.







 US surveys also at multi year highs:








Now some industrial production indexes around the globe:


EM looks pretty flat and DM could turn for a while as talked above…

BRL very expensive?

I read this news (link below) yesterday that indicates that BRL might be very expensive according to three models from Deutsche Bank. Though I don't have access to those models metrics, it got my attention because that information doesn't really fit very well with some simple models I run. I know there are lots of ways to model FX and as everyone might know its not a very easy market to figure out, specially for EM, where lots of feedback loops between country risk and FX rate happens and you can have long and short term models. Another point, specially for the PPP metric is the timeframe chosed. Anyway, just decided to post my findings here because they contrast with the DB picture. They might be right but here is my view:

Business Insider (Australia) link for the news:

 https://www.businessinsider.com.au/currency-valuations-september-deutsche-bank-2017-10


That's DB chart...



My Behavioral model based on Commodities and CDS (YoY %)




PPP metrics based on CPI and PPI




I wou…

Ibov, long term perspective

After a stellar performance in the last one year and a half or so some might be asking if IBOV is running ahead of itself, specially if we take into account all the political turmoil in the recent past and the uncertainties about the next year election. But though recently Ibov reached the historical highs in BRL terms it's still way below in USD terms and relative to other EM markets. The only certainty is that no one knows for sure what is going to happen, so my intention here is just to put the actual levels on a more historical perspective to clarify a bit where we are at this point. And in my humble opinion Ibov still have room to go in the next 2 to 5 years. (if we don't follow a venezuela path of course, but think that risk is low).

Ibov in USD log terms since 1968



removing it from the trend...




5 years annual compound return...





10 years annual compound return...



relative value of the EWZ ETF against EEM...



and finally a simple model to test Ibov (BRL) annual return…

Global Trade

Quick post here. I have been following a bunch of indexes and proxies of global trade volume for a while. I think its very important not just because we can have a picture of global growth, specially for emerging markets, but also because as commodities has in general become more traded by large numbers and types of players, including financial institutions, they have become more prone to herding behavior in the short time and sometimes losing its status as a proxy of global trade.
Well, what most of them have been showing recently is that so far global trade measured in volume keep improving. Below some charts of those indexes:

CPB global trade volume and prices

RWI Container Throughput Index


next, Cass Freight Index and Intermodal Traffic Index. Both are more related to US trade but also corroborating with the idea of a more healthy global trade


I don't like much the Baltic dry index because it also has the component of supply/demand of ships affecting it but if you like it...



Commodities

Commodity prices in general have been soaring for almost one year and based on year over year returns are now at levels only seen a few times. Though very often prices, specially for assets wide traded, usually front run the real economy, with some time in our favor it is possible to at least question those price actions. Possibly could be too early to question that but its getting intriguing in my humble opinion.
Some charts and thoughts below:
Commodities (equal weighted index) YoY + 2 standard deviation.


In the meantime global trade volume (CPB data) have improved somewhat but hardly to the same extend as commodity prices. Last time we have seem those price levels trade volume were running at 5 to 10% against 3% now on YoY. (trade volume LHS)

  using the two Y axes:

by the way, its also interesting how trade volume is weak and lagging behind some other economic measures that it used to have some correlation like the US ISM PMI.


Built this easy model to figure out at least to som…